The Trump campaign proposed a $1 trillion program to foster private investment in aging public-sector infrastructure. According to a proposal by Wilbur Ross and Peter Navarro, eligible projects would be large-scale infrastructure that has, or could have, robust user-fee revenue streams. Revenue-based financing (equity and debt) would be used to raise the needed capital up-front, with investors being paid back over time via the dedicated revenue streams. Eligible projects could include airports, highways, seaports, water-supply, and wastewater treatment facilities.
For the past 15 years, infrastructure investment funds, infrastructure companies, and others have been eager to invest in U.S. P3 projects of this kind. But they have confronted a relatively small number of projects. According to a new Reason Foundation study, that problem stems from two causes: unfamiliarity with P3 models by state and local policymakers and federal barriers to private capital investment in state and local infrastructure. (Download the report here.)
The study identifies thousands of potential project opportunities, in the form of existing airports, highways, seaports, water systems, etc. It then shines a spotlight on an array of federal obstacles that make it difficult, financially disadvantageous, or impossible to do the kinds of P3 infrastructure renewal that takes place routinely in Canada, Europe, and Latin America. Among the largest barriers are the following:
- A very restricted airport privatization pilot program that erects barriers not found in other countries;
- A federal ban on using toll revenues to finance the reconstruction and modernization of aging Interstate highways (except for a tiny pilot program); and,
- A rule from the Office of Management & Budget requiring that if a facility has received direct federal grants, the grant money must be repaid if the facility is leased or sold (which functions as a de-facto tax on such transactions).
But by far the greatest federal obstacle is the inability, in most cases, to use tax-exempt revenue bonds for P3 projects. Since state and local agencies can and do use such tax-exempt bonds for infrastructure, the result is a non-level financial playing field. This kind of disparity between taxable and tax-exempt revenue bonds for infrastructure is virtually unheard of in other developed countries. To the extent that a P3 project cannot obtain tax-exempt bond financing, its financing costs and user fees will be higher, and opponents will cite these as reasons not to use the P3 approach.
The Reason Foundation report proposes two policy changes that would create a level financial playing field for P3 infrastructure renewal. First, generalize the existing Private Activity Bond (PAB) program that now applies only to surface transportation projects to apply to P3 projects for all categories of public-purpose infrastructure. Second, allow the new PABs to be used to acquire and reconstruct existing infrastructure, not just to build new projects.
These two tax changes might find bipartisan support in Congress. First, construction unions generally favor P3 procurement, since this tends to expand the size of the pie by increasing the size and number of major infrastructure projects. Second, the Obama Administration in 2015 had proposed something similar: Qualified Public Infrastructure Bonds (QPIBs) whose purpose was to “extend the benefits of municipal bonds to public-private partnerships.” The White House fact sheet summarizing the proposal pointed out that, unlike the surface transportation PABs, the new QPIBs would:
- Have no expiration date;
- Have no volume cap; and,
- Not be subject to the Alternative Minimum Tax (AMT).
These provisions should all be included in the reform.
Critics will likely claim that these tax changes would cost the U.S. Treasury a significant amount of revenue if they were widely used. But this would only be true if most of the projects to rebuild U.S. infrastructure would otherwise have been carried out with taxable bond financing. The fact that we have a huge backlog of such projects that are not being funded and carried out suggests that very little such investment is attractive with taxable bond financing. The overwhelming majority of U.S. infrastructure projects are financed with tax-exempt municipal bonds.
Secondly, any marginal loss of revenue that might result from allowing wide use of tax-exempt revenue bonds for P3 projects would likely be offset by increased federal tax revenues, of two kinds. To the extent that the new P3 concession companies were profitable, they would pay federal corporate income taxes on those profits. And a large increase in construction work over several decades would likely lead to more jobs for construction workers and more overtime—so their marginal increases in wages would increase personal income tax revenues.
The Reason report does not directly address the alleged need for a federal tax credit to provide an incentive for equity investors in P3 infrastructure projects. That feature of the Ross and Navarro proposal has been a lightning rod for opposition, as a “give-away to Wall Street,” etc. But there is no lack of incentive for infrastructure funds, pension funds, investment banks, etc. to invest equity in U.S. infrastructure. What these would-be investors lament is the lack of a pipeline of large-scale P3 projects. That lack is due to explicit federal barriers of the kind documented in our new report, and especially the non-level financial playing field. The new Administration and Congress could readily address those barriers—and drop the tax credit for equity as not needed.
Download the report here.
(Reprinted from Reason Foundation’s Surface Transportation News, January 25, 2017)